INSOLVENCY LECTURE 8
LAW EXTENSION COMMITTEE
1
TYPICAL SEQUENCE OF EVENTS
Court judgment
Presentation of
creditor’s petition
Issue and service
of
bankruptcy notice
Court hearing
Failure to comply
= act of bankruptcy
Court makes
sequestration order
2
FORMAL REQUIREMENTS
•
A bankruptcy notice shall be in the form prescribed by the Regulations - s 41(2)
41 Bankruptcy notices
(1) An Official Receiver may issue a bankruptcy notice on the application of
a creditor who has obtained against a debtor:
(a) a final judgment or final order that:
(i) is of the kind described in paragraph 40(1)(g); and
(ii)is for an amount of at least $5,000; or
(b) 2 or more final judgments or final orders that:
(i) are of the kind described in paragraph 40(1)(g); and
(ii)taken together are for an amount of at least $5,000.
(2) The notice must be in accordance with the form prescribed by the
regulations.
3
FORM 1 IS PRESCRIBED
•
Reg 4.02 prescribes Form 1:
4.02
Form of bankruptcy notices
(1) For the purposes of subsection 41 (2) of the Act, the form of bankruptcy
notice set out in Form 1 is prescribed.
(2) A bankruptcy notice must follow Form 1 in respect of its format (for
example, bold or italic typeface, underlining and notes).
(3) Subregulation (2) is not to be taken as expressing an intention contrary
to section 25C of the Acts Interpretation Act 1901.
Note Under section 25C of the Acts Interpretation Act 1901, where an Act
prescribes a form, then, unless the contrary intention appears, strict
compliance with the form is not required and substantial compliance is
sufficient; see also paragraph 46 (1) (a) of that Act for the application of that
Act to legislative instruments other than Acts.
4
FEATURES OF FORM 1
•
Form 1 is found in Schedule 1 to the Bankruptcy Regulations - it on the
Webcampus
•
The amount of the debt must be specified
•
A copy of the creditor’s judgment must be attached
•
Payment of the debt is required within 21 days of service
•
The notice specifies the person to whom payment must be made and the
address at which payment must be made
•
A basic summary of s 41 is given to the debtor
•
The Schedule sets out the calculation of the debt including interest and costs
5
THE NOTICE IS ISSUED BY THE OFFICIAL RECEIVER
•
Application is made to the Official Receiver for the issue of a notice - Reg 4.01
(1)
In order to apply for the issue of a bankruptcy notice, a person must lodge
with the Official Receiver:
(a)
a duly completed draft bankruptcy notice; and
(b)
one of the following documents in respect of the final judgment or final
order specified by the person on the approved form:
………………………………………. and
(c) a copy of the draft bankruptcy notice for the Official Receiver’s records
and sufficient additional copies of the draft bankruptcy notice for service
and for annexure to any required affidavits of service.
6
REQUIREMENTS FOR A VALID NOTICE
•
It must correctly state the amount of the debt
•
It must give the debtor sufficient time (usually 21 days) to pay the debt
•
It must nominate a place for payment
•
It must be based upon a final judgment or order s 40(1)(g)
•
The execution of the judgment or order must not have been stayed - s 40(1)(g)
•
The claim must be for more than $5,000 - s 41(1)(a)
7
SERVICE OF THE NOTICE
•
May be served in accordance with Reg 16.01
– sent to last-known address
– left in envelope at DX
– left at last known address
– served personally
– sent by fax or other electronic mode
•
Must be served within 6 months of issue -Reg 4.02A
•
Substituted service - s 309(2)
(2) Where a notice or other document is required by this Act to be served on or
given to a person, the Court may, in a particular case, order that it be given
or served in a manner specified by the Court, whether or not any other
manner of giving or serving the notice or other document is prescribed.
•
See FCBR 3.01
8
DEFECTS OR IRREGULARITIES
•
Bankruptcy notices will be construed strictly - Re Walsh (1982) 47 ALR 751:
“A bankruptcy notice sets in motion the whole process leading to bankruptcy
and must, since the proceedings are of a quasi-penal nature, be construed
strictly.”
•
substantive defects - essential requirements - misleading the debtor
9
SECTION 306
•
s 306
306 Formal defect not to invalidate proceedings
(1)
Proceedings under this Act are not invalidated by a formal
defect or an irregularity, unless the court before which the objection on
that ground is made is of opinion that substantial injustice has been
caused by the defect or irregularity and that the injustice cannot be
remedied by an order of that court.
(2)
A defect or irregularity in the appointment of any person
exercising, or purporting to exercise, a power or function under this Act or
under a personal insolvency agreement entered into under this Act does not
invalidate an act done by him or her in good faith.
10
DEFECTS OR IRREGULARITIES
•
Kleinwort Benson Australia v Crowl 1988 HCA 34
•
This case concerned a bankruptcy notice which understated the amount of
interest due on the debt. The debtor challenged the validity of the notice
because of the understatement of interest. The High Court said that three
questions arose as to the validity of the bankruptcy notice in the case:
(a) was the notice defective or irregular?
(b) if so, is the defect or irregularity substantive or formal?
(c) if the defect is formal only, has it occasioned substantial and irremedial
injustice?
•
The inclusion in a bankruptcy notice of an amount for interest due on a judgment
debt poses practical problems. The bankruptcy notice is issued by the Official
Receiver. Such notices may be filed, but issued on a later day, so it is not
always possible to calculate the amount of interest due as at the date of issue.
That will result in an understatement of the amount of interest.
11
DEFECTS OR IRREGULARITIES
•
Understatement of the amount due will constitute a defect which is substantive
rather than formal, only if the understatement is objectively capable of
misleading the debtor as to what is necessary for compliance with the notice. If
the notice produces uncertainty as to whether the debtor is required to pay the
amount in fact due or the amount specified in the notice, then it is capable of
misleading the judgment debtor. However, no such uncertainty arises if it is
clear that payment of the amount specified in the notice will constitute
compliance with the notice.
•
In the present case there could be no uncertainty as to what would constitute
compliance with the notice. The notice required a particular amount to be paid,
and failure to pay that particular amount would constitute an act of bankruptcy.
The understatement was thus a formal defect or irregularity which attracted the
operation of s.306(1) of the Bankruptcy Act.
12
DEFECTS OR IRREGULARITIES
•
Adams v Lambert [2006] HCA 10
•
This case concerned a defect in a bankruptcy notice, being the misdescription in
the notice of the statutory provision under which interest was claimed. The
amount of such interest was $66.58 which was interest upon a judgment debt.
The bankruptcy notice referred to such interest being due under s.83A of the
District Court Act. That section deals with interest up to judgment. The notice
should have referred to s.85, which deals with interest after judgment.
•
The trial judge found that the notice was invalid and dismissed the petition. An
appeal to the Full Court of the Federal Court was also dismissed.
•
Here there had been failure to comply with a requirement of the Act and the
Regulations. The question then became whether the failure to comply was a
defect or irregularity which was a formal defect or irregularity within the scope of
s.306. It was necessary to consider whether substantial injustice had been
caused by the defect or irregularity.
13
DEFECTS OR IRREGULARITIES
•
The calculation of post-judgment interest is a well-known source of difficulty for
drafters of bankruptcy notices. The difficulty is sometimes avoided by refraining
from including interest in the debt upon which the bankruptcy notice is based. In
this case the calculation of interest was correct.
•
The High Court referred to its earlier decision in Kleinwort and said that if the
error could reasonably mislead a debtor as to what is necessary to comply with
the notice, then it is not merely a formal defect or irregularity. The
misdescription of the section of the District Court Act under which interest was
due was not capable of misleading the debtor as to what he had to do to comply
with the notice. The question was whether the misdescription involved a failure
to meet a requirement made essential by the Act.
•
The High Court said that it was important to look at the scheme of the Act and
the Regulations in their entirety. This included s.41(5) which provided that an
overstatement of amount in a bankruptcy notice would not necessarily be a
defect. The court should not emphasise form over substance. The court held
that the error in the notice was covered by s.306 and thus the notice was valid.
The appeal was allowed.
14
CHALLENGING BANKRUPTCY NOTICES
•
Bankruptcy law is often highly technical, and occasionally far removed from
common sense” - Kyriackou 138 FCR 324
•
Application to set aside judgment on which notice is based - s 41(6A)(a)
•
Application to set aside the bankruptcy notice - s 41(6A)(b)
•
Extending time for compliance - s 41(6A)
•
41 (6A)
Where, before the expiration of the time fixed for compliance
with the requirements of a bankruptcy notice:
(a)
proceedings to set aside a judgment or order in respect of
which the bankruptcy notice was issued have been instituted by the
debtor; or
(b)
an application has been made to the Court to set aside the
bankruptcy notice;
the Court may, subject to subsection (6C), extend the time for compliance
with the bankruptcy notice.
See FCBR 3.03
15
CHALLENGING BANKRUPTCY NOTICES
•
Application to set aside a defective notice
– defect is substantial not formal
– defect is capable of reasonably misleading the debtor
– examples of invalid notices - see Nichols 129-134
– overstatement of amount - s 41(5), (6):
– see FCBR 3.02(1)
(5) A bankruptcy notice is not invalidated by reason only that the sum specified
in the notice as the amount due to the creditor exceeds the amount in fact due,
unless the debtor, within the time allowed for payment, gives notice to the
creditor that he or she disputes the validity of the notice on the ground of the
misstatement.
(6) Where the amount specified in a bankruptcy notice exceeds the amount in
fact due and the debtor does not give notice to the creditor in accordance with
subsection (5), he or she shall be deemed to have complied with the notice if,
within the time allowed for payment, he or she takes such action as would have
constituted compliance with the notice if the amount due had been correctly
specified in it.
16
OVERSTATEMENT OF AMOUNT
Skouloudis v St George Bank Ltd [2008] FCA 1765
•
The debtor served a s 41(5) notice alleging overstatement of the amount;
•
The creditor applied to amend the notice;
•
Overstatement in a bankruptcy notice renders the notice invalid, whether or not
the overstatement could reasonably mislead the debtor, if a notice complying
with s 41(5) has been given;
•
Bankruptcy notice is then invalid from time of issue;
•
In those circumstances, no power to amend the notice under s 33(1)(b).
17
COUNTER-CLAIM, SET-OFF OR CROSS-DEMAND
•
quantum must be equal to or exceed the judgment debt - s 40(1)(g)
•
must be a counter-claim which could not have been set up in original
proceedings - s 40(1)(g)
•
extension of time for compliance pending challenge on ground of a cross-claim s 41(7)
•
the debtor must show that he has a prima facie case - Ebert v Union Trustee
[1960] HCA 50
•
court must weigh up the merit of the counter-claim with the justice of allowing
bankruptcy proceedings to go ahead or be stayed - Guss v Johnstone [2000]
HCA 26
See FCBR 3.02(2)
•
18
COUNTER-CLAIM, SET-OFF OR CROSS-DEMAND
Ebert v Union Trustee [1960] HCA 50
•
This High Court decision concerned the standard of evidence necessary to
satisfy the court that a debtor had a counter-claim, set-off or cross-demand
which could be set up in opposition to an application for a sequestration order.
•
The facts of the case are very complicated, although the judgment is quite short.
It is not necessary to understand the facts. The case stands for two
propositions:
(a) a party cannot satisfy the court that a cross-demand exists by showing no
more than that he propounds one and stating how he suggests that he can
make it out;
(b) the standard may be expressed by saying that the debtor must show that he
has a prima facie case, even if then and there he does not adduce the
admissible evidence which would make out a prima facie case before a
court trying the issues that are involved in his counter-claim, set-off or
cross-demand.
19
COUNTER-CLAIM, SET-OFF OR CROSS-DEMAND
Guss v Johnstone [2000] HCA 26
• This is another decision of the High Court as to whether a court was satisfied
that the debtor has a counter-claim, set-off or cross-demand. The creditor was
a barrister and the debtor was a solicitor. The barrister had a judgment for
$4,989.40 against the solicitor for fees. The solicitor debtor attempted to
persuade the Federal Court that he had a counter-claim against the barrister.
He failed before the Federal Court and before the Full Federal Court.
•
The trial judge took into account the lengthy delay of five years before the debtor
raised an allegation of professional negligence against the barrister. This
contributed to his lack of satisfaction that the solicitor had a prima facie case.
•
The High Court observed that the decision made by the trial judge was not a
determination of the rights of the parties in relation to the supposed cross-claim.
Those rights could be determined in separate proceedings or they could be
examined at the time of application for a sequestration order. What the court
looks at is whether it is just that the claim should be determined before the
bankruptcy proceedings are allowed to continue. In other words, whether it is a
claim which it is proper and reasonable to litigate.
20
CHALLENGING BANKRUPTCY NOTICES
•
If consulted by a client served with a Bankruptcy Notice - ACT QUICKLY
•
Even if the underlying judgment is later set aside, the act of bankruptcy remains
(another creditor might use it)
•
The debtor’s solvency is no defence to a bankruptcy notice
•
The court does not have a general discretion to set aside a notice (unllike the
discretion in s 52 to decline to make a sequestration order on the hearing of a a
petition)
21
CHALLENGING NOTICES - FORMALITIES
FEDERAL COURT (BANKRUPTCY ) RULES
Rule 3.01 Substituted service
Rule 3.02 Setting aside bankruptcy notice
Rule 3.03 Extension of time for compliance
22
TYPICAL SEQUENCE OF EVENTS
Court judgment
Presentation of
creditor’s petition
Issue and service
of
bankruptcy notice
Court hearing
Failure to comply
= act of bankruptcy
Court makes
sequestration order
23
CREDITOR’S PETITIONS
INTRODUCTION
•
If a debtor is unable to pay a creditor, or has refused to pay, the creditor may
choose to initiate proceedings to bankrupt the debtor.
•
The proceedings are commenced by the creditor “presenting” (I.e. filing) an
application to the court called a “creditor's petition” and that petition will seek the
sequestration of the debtor's estate, which will cause bankruptcy.
•
A creditor has six months from the date of the act of bankruptcy in which to
present a petition; that time cannot be extended.
•
The jurisdiction to make sequestration orders is set out in section 43 of the
Bankruptcy Act.
•
If the court makes a sequestration order, then the debtor becomes bankrupt and
the trustee will take over the estate (I.e. the property) of the bankrupt and
administer it for the benefit of creditors.
24
CREDITOR’S PETITIONS
Section 43 – Jurisdiction to make Sequestration Orders
Where:
•A debtor has committed an act of bankruptcy
•There is the requisite territorial connection with Australia
•The Court MAY, on a petition presented by a creditor, make a sequestration order
against the estate of the debtor
25
CREDITOR’S PETITIONS
Section 44 – Conditions on which creditor may petition
A creditor’s petition shall not be presented unless:
•There is a debt of more than $5,000
•The debt is a liquidated sum
•Payable either immediately or at a certain future time
•The act of bankruptcy was committed within the last 6 months
26
CREDITOR’S PETITIONS
Section 47 – Requirements as to creditor’s petition
•
Must be verified by an affidavit of a person who knows the relevant facts
•
Must be in the form prescribed by the court rules
•
FCBR Rule 4.02 prescribes Form 6
•
Except with the leave of the Court, a creditor’s petition shall not be withdrawn
after presentation
•
See also FCBR Part 4 as to formalities
27
SERVICE OF A CREDITOR’S PETITION
•
The petition, verifying affidavits and consent (if any) must be served on the
debtor.
•
Provisions for service are normally personal – see Reg 16.01 - however an
order for substituted service can be made under section 309(2): see re Skase;
ex parte Donnelly (1991) 32 FCR 212. Service must be effected not less than 5
days before the hearing. Service can be out of the jurisdiction provided that
when the act of bankruptcy was committed, any of the requirements of section
43(1)(b) would have been satisfied.
•
A creditor's petition will lapse after 12 months: section 52(4). However, it can be
extended to 24 months in the circumstances that are set out in section 52(5) of
the Act and where are the “slip rule” applies: See Nichols 64.
28
HEARING OF A CREDITOR'S PETITION
•
If a debtor wants to oppose the petition, they are required to file a notice of
opposition at least three days before the date of the hearing: see Form 5.
•
At the hearing, the petition may either be dismissed, adjourned, withdrawn, or a
sequestration order made.
 As to dismissal - this will occur if the petition is flawed (e.g. where the debt
is below $5,000 or if the debt has been satisfied).
 As to withdrawal - see section 47(2) and the need to obtain the leave of the
court.
 As to adjournment - this will often occur to give the debtor time to pay.
•
Note: provision exists for a creditor to be substituted for another creditor - see
section 49.
29
OBTAINING A SEQUESTRATION ORDER
•
Section 52(2) of the Act gives the court a discretion to dismiss the petition “may”.
•
Apart from any issue of discretion, the court may dismiss the petition because it
is technically deficient. The debtor has the onus of proving that there is
sufficient cause for a sequestration order not being made. Usually the major
defence is that there is some fatal flaw in the bankruptcy notice eg an omission
or defect in the form, or defect in its execution or its service. A petition presented
more than six months after the date of the act of bankruptcy is flawed and must
be dismissed, as must a petition claiming a debt of less than $5,000.
•
If the bankruptcy notice is flawed, the petition must be dismissed as there is no
act of bankruptcy on which to found it and the court has no jurisdiction to
proceed.
30
GOING BEHIND THE JUDGMENT
•
A court hearing a bankruptcy petition can go behind the judgment on which the
creditor relies in order to ascertain whether the judgment was founded on a real
debt. Part of the rationale for this is that not only are the courts dealing with
rights of the particular judgment creditor and debtor, but they are also dealing
with the rights of the debtor's other creditors.
•
The Court will not generally go behind such a judgment unless it can be shown
that it was obtained by default, or compromise, or where fraud or collusion is
alleged.
31
GOING BEHIND THE JUDGMENT
In Udovenko v Mitchell (1997) 79 FCR 418, Davies J held at 421 that, “the
circumstances in which a court will go behind a judgment cannot be stated in a
definitive manner; however there are two guiding principles.
First as Fullagar J said in Corney v Brien;
“if the judgement in question followed a full investigation and trial on which
both parties appeared, the court will not reopen the matter unless a prima facie
case of fraud or collusion or miscarriage of justice is made out..”
Secondly in the same case, Dixon, Williams Webb and Kitto JJ cited the
remarks of Latham CJ in Petrie v Redmond that ..
“The court looks with suspicion on consent judgments and default
judgments”. Fullagar J put this point more forcefully when he said:
“But, wherever the judgment in question is a judgment by default, it
appears that the court will always “go behind” the judgment if there is what it
regards as a bona fide allegation that no real debt “lay behind” the judgment.”
32
GOING BEHIND THE JUDGMENT
Courts may decide whether or not to accept the judgment as satisfactory proof
of the debt claimed: Wren v Mahony (1971-72) 126 CLR 212.
In Wren, the High Court held that the Bankruptcy Court not only may go behind
a judgment, but must do so if there appear to be substantial reasons to doubt
whether there really was a debt due to the petitioning creditor.
Further it was held that a judgment after the trial of an action will not usually be
re-opened unless a prima facie case of fraud or collusion or miscarriage of
justice is made out.
33
GOING BEHIND THE JUDGMENT
In going behind the judgment a court may find that the part of the judgment is still
payable notwithstanding the part that is impugned. However, the court will only
reconsider the judgment in order to ascertain whether the petitioning creditor’s
debt on which the bankruptcy proceedings have been founded should be struck
out altogether. The court does not reconsider the judgment merely with a view to
seeing whether the judgment debt should be reduced.
Where a debtor appeals from the judgment upon which the bankruptcy notice
and creditor's petition is based, they may be able to have the bankruptcy
hearing adjourned until after the appeal is determined if it is bona fide and based
upon genuine and substantial grounds.
34
SOLVENCY AS A DEFENCE
Note section 52(2) of the Act which gives the court discretion to dismiss the
petition. See the two criteria in (a) and (b) of that section.
(a)
ability to pay debts (section 52(2)(a))
A sequestration order is not appropriate where a debtor who is able to pay his
debts, refuses to do so. The words, “ability to pay” do not mean “willing and able
to pay”.
In Re Sarina; Ex Parte Wollondilly Shire Council (1980) 32 ALR 596, Deane
J held that there was no policy discernible in the legislation which allows a
creditor to make bankrupt a recalcitrant but solvent debtor. However the test in
re Sarina is not to be applied in a sterile way.
35
SOLVENCY AS A DEFENCE
The test of ability to pay debts was stated by Barwick CJ in Sandell v Porter
(1966) 115 CLR 666 (covered in Lecture 1) at 670 as follows:
“Insolvency is expressed in s. 95 as an inability to pay debts as they fall due out
of the debtor's own money. But the debtor's own moneys are not limited to his
cash resources immediately available. They extend to moneys which he can
procure by realization by sale or by mortgage or pledge of his assets within a
relatively short time - relative to the nature and amount of the debts and to the
circumstances, including the nature of the business, of the debtor. The
conclusion of insolvency ought to be clear from a consideration of the debtor's
financial position in its entirety and generally speaking ought not to be drawn
simply from evidence of a temporary lack of liquidity. It is the debtor's inability,
utilizing such cash resources as he has or can command through the use of his
assets, to meet his debts as they fall due which indicates insolvency.”
36
SOLVENCY AS A DEFENCE
•
The reference to the ability to pay debts “as they become due from his own
money” has since been removed from the section. Nevertheless, the approach
adopted in Sandell has been applied to the current wording of the section,
“unable to pay his or her debts” in section 52(2)(a).
•
In such cases the debtor has the onus of proving solvency: ANZ Banking
Group Ltd v Foyster [2000] FCA 400.
•
It has been held that the discretion under section 52(2)(a) should not be
exercised unless the debtor demonstrates that the petitioning creditor will be
satisfied from the ordinary remedies such as execution and garnishment; hence,
proof of solvency may not be enough.
37
SOLVENCY AS A DEFENCE
If the debtor’s solvency is based upon assets not available under execution or
garnishment by creditors, that may not be proof of solvency. If the debtor has
the capacity to borrow to pay the debt, but does not do so, the court may
exercise a discretion against the debtor. It is not enough that the debtor simply
establish that the value of their assets exceeds the value of their liabilities. The
debtor is required to establish that the assets are available to be realised and
capable of ready realisation likely to result in payment of the debtor's debt within
a reasonable time.
An assessment of solvency for the purposes of section 52(2)(a) involves an
examination of not only debts presently owing but the debts falling due in the
reasonably immediate future.
38
OTHER SUFFICIENT CAUSE
“other sufficient cause”
In section 52(2)(b), reference is made to “other sufficient cause”: see Clyne v
Deputy Commissioner of Taxation (1985) 5 FCR 1 which held that the
circumstances constituting such are extremely varied and include public interest
considerations. The circumstances have been held to include:
•
no service of the originating process which led to the entry of judgment on which
the petition is based;
•
the existence of a claim by the debtor amounting to a set off or cross-claim or
cross-demand against the petitioner. The debtor must establish the existence of
the “sufficient cause” and some evidence must be provided to enable the court
to evaluate the claim and be satisfied that it will be prosecuted;
39
OTHER SUFFICIENT CAUSE
“other sufficient cause” (cont.)
•
where the debtor offers payment but this is declined by the creditor;
•
where there is a pending appeal against the judgment relied on as the
foundation of the bankruptcy proceedings and the appeal is based on genuine
and arguable grounds;
•
bias;
•
futility of bankruptcy; Re Capel [1998] FCA 372;
•
improper purpose ie the bankruptcy proceedings are used as a means of
extortion: Rozenbes v Kronhill (1956) 95 CLR 407;
40
STAY OF THE SEQUESTRATION ORDER
•
The court does not have power to suspend the operation of a sequestration
order other than for a period not exceeding 21 days - section 52(3): see Nichols
165;
•
Stays are granted reluctantly.
LAPSE OF PETITION
•
A creditor’s petition lapses in the circumstances set out in section 52(4). See
Nichols 165.
•
Usually that is at the expiration of 12 months commencing on the date of
presentation of the petition unless the court makes an order for another period.
EXTENSION OF LIFE OF PETITION
•
A court may, if it thinks just and equitable, at any time before the expiration of 12
months commencing on the date of presentation of a creditor’s petition, order
the period to be extended for up to an extra 12 months - s 52(5).
41
STATEMENT OF AFFAIRS BY BANKRUPT
Where a sequestration order is made, the person against whose estate it is
made shall, within 14 days from the date on which he or she is notified of the
bankruptcy:
•
make out and file with the Official Receiver for the District in which the
sequestration order was made a statement of his or her affairs; and
•
furnish a copy of the statement to the trustee: s 54.
Failure to file a statement of affairs means that time will not begin to run for the
purpose of automatic discharge from bankruptcy (ie after 3 years).
42
DEBTOR’S PETITIONS
•
A debtor may choose to go voluntarily bankrupt. This is done by presenting a
“debtors’ petition” to the Official Receiver. Up to 90% of bankruptcies are
voluntary.
•
There are three types of debtor’s petitions that may be presented:
- by an individual debtor;
- by joint debtors;
- by partnership debtors.
43
WHO MAY PRESENT A DEBTOR’S PETITION ?
•
Any debtor except for a corporation, partnership, or association is able to
present a debtor's petition.
•
A debtor who presents a debtor's petition needs to show a connection with
Australia: see section 55(2A).
DEBTOR’S PETITIONS OF INDIVIDUAL DEBTORS
•
Debtors need to file a statement of affairs in the statutory form: section 55(2)
and Form 3. In that statement a list of all assets and liabilities and other
prescribed information is given.
•
The petition is presented to the Official Receiver in bankruptcy who must accept
it unless a decision is made to reject it under section 55(3). Note the discretion
to reject in section 55(3) and (3AA). Some petitions must be rejected - see
section 55(2A).
44
DEBTOR’S PETITION AS AN ABUSE OF PROCESS
•
The right to present a desert debtor's petition has the potential to be abused.
•
A debtor who was not insolvent or who does not believe himself or herself to be
insolvent and who presents a petition may be regarded as presenting for an
improper purpose and, in and such cases, the creditor can apply for an
annulment of the bankruptcy on the basis that it should not have been accepted:
BWK Elders (Australia) Pty Ltd v White [2004] FCA 1611.
•
If the purpose of the debtor's petition was to avoid liability of a kind that results
from the operation of the bankruptcy laws themselves, making it, for example,
impossible for a creditor to obtain a sequestration order, it can be annulled.
•
The onus is on the creditor to establish that the debtor has a improper purpose:
see also re Thanos (unreported, Federal Court, 14 October 1988) referred to in
Keays at page 62.
•
It is not an abuse of process for a debtor to present a debtor’s petition in order to
prevent a creditor from succeeding on a creditor's petition: see also section
115(2).
45
COURSE OF A HEARING
See Creditor’s Petition Checklist
See also Guide to Filing a Creditor’s Petition - Federal Magistrates Court of Australia
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PETITIONS - FORMALITIES
FEDERAL COURT (BANKRUPTCY ) RULES
Rule 4.02 Requirements for Creditor’s Petition and Supporting Creditor’s Affidavit
(see also Form 6)
Rule 4.04 petition founded upon failure to comply with bankruptcy notice
Rule 4.05 Documents to be served
Rule 4.06 Additional affidavits to be filed before hearing
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QUESTION 3 FROM MARCH 2014 EXAM
Dave Bowman, an electrician, has been buying high voltage components from Sine
Pty Limited (“Sine”) for 15 years. He has had a friendship with the Sine sales
manager all that time, and if Dave has fallen behind in payment, the sales manager
has been happy to wait. However, Dave’s friend is made redundant and the new
sales manager insists on payment on time. Dave is quite offended and fails to pay
for three months just to make a point.
Sine sues Dave for $15,000 in the Local Court and obtains a default judgment. Sine
issues a Bankruptcy Notice which claims $17,500 but Dave ignores this too. The
Notice was left overnight under the windscreen wiper of his ute. Sine presents a
Creditor’s Petition to the Federal Court, which is listed for hearing in a fortnight.
Dave comes to you for legal advice.
Advise Dave how to avoid bankruptcy and what he has to do.
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